A share repurchase, also known as a share buyback, occurs when a corporation acquires its own issued shares from one or more shareholders. Share repurchases are commonly used for shareholder exits, corporate reorganizations, estate planning, tax planning, employee departures, dispute resolution, and succession planning.
Unlike a share transfer, where one shareholder sells shares to another shareholder or third party, a share repurchase results in the corporation itself acquiring and generally cancelling the shares, thereby reducing the corporation's issued share capital.
At Substance Law, we advise corporations, shareholders, founders, investors, and family businesses throughout Canada on share repurchases, share redemptions, corporate reorganizations, tax-driven buybacks, shareholder exits, and related corporate transactions.
What Is a Share Repurchase?
A share repurchase is a transaction in which a corporation purchases its own issued shares from a shareholder.
Following the repurchase, the shares are generally cancelled unless otherwise permitted by the applicable corporate statute.
Share repurchases may be completed:
- voluntarily;
- pursuant to a shareholder agreement;
- pursuant to a unanimous shareholder agreement;
- as part of a negotiated settlement;
- following the death of a shareholder;
- during corporate reorganizations;
- in connection with acquisitions;
- as part of succession planning; or
- under statutory rights.
Share Repurchase vs. Share Redemption
Although the terms are sometimes confused, they do not necessarily mean the same thing.
A share redemption typically involves redeemable shares that the corporation has the contractual or statutory right to redeem pursuant to its articles.
A share repurchase (or share buyback) generally involves the corporation purchasing issued shares from a shareholder pursuant to an agreement or applicable corporate legislation.
The distinction can have important corporate and tax implications.
Why Do Companies Repurchase Shares?
Businesses repurchase shares for many reasons.
Common examples include:
- shareholder retirement;
- founder exits;
- estate administration;
- shareholder disputes;
- corporate reorganizations;
- succession planning;
- employee departures;
- simplifying ownership;
- implementing buy-sell provisions;
- complying with shareholder agreements; and
- facilitating acquisitions.
Every repurchase should be structured having regard to both corporate and tax consequences.
Shareholder Agreements
Many private corporations include mandatory buyback provisions within their shareholder agreements.
These provisions may require or permit share repurchases following events such as:
- death;
- disability;
- retirement;
- bankruptcy;
- termination of employment;
- divorce;
- loss of professional licensing;
- breach of the shareholder agreement;
- deadlock; or
- default events.
Properly drafted buy-sell provisions can significantly reduce future disputes.
Director Approval
A corporation generally cannot simply purchase its own shares without proper corporate authorization.
Depending upon the applicable corporate statute and the corporation's governing documents, approvals may include:
- board resolutions;
- shareholder resolutions;
- unanimous shareholder resolutions;
- class approvals;
- amendments to articles; and
- updates to corporate records.
Corporate approval requirements should always be reviewed before proceeding.
Solvency Requirements
Canadian corporate statutes generally impose solvency tests before a corporation may acquire its own shares.
Although the specific statutory language differs depending on the governing legislation, directors generally must consider whether the corporation will remain able to satisfy applicable solvency requirements following the repurchase.
Proceeding with an unlawful share repurchase may expose both the corporation and its directors to legal consequences.
Determining the Purchase Price
The purchase price may be established using various methods.
Common approaches include:
- negotiated value;
- formula pricing;
- independent business valuation;
- shareholder agreement formulas;
- fair market value;
- book value;
- earnings multiples; or
- appraisal rights where available.
Proper valuation often reduces future shareholder disputes.
Payment Terms
Share repurchases may be completed using:
- lump-sum payments;
- promissory notes;
- vendor financing;
- instalment payments;
- set-off arrangements;
- share-for-share exchanges;
- corporate reorganizations; or
- other negotiated consideration.
Payment terms should reflect the corporation's financial position and applicable legal requirements.
Tax Considerations
Share repurchases frequently have significant tax consequences.
Issues may include:
- deemed dividends;
- capital gains;
- adjusted cost base;
- paid-up capital;
- safe income;
- shareholder loans;
- estate freezes;
- section 84 of the Income Tax Act;
- subsection 84(3) deemed dividend treatment;
- section 85 rollovers;
- pipeline planning;
- surplus stripping considerations; and
- corporate reorganizations.
Tax advice should be obtained before completing any significant share repurchase.
Estate and Succession Planning
Share repurchases are commonly used as part of estate planning.
Examples include:
- funding buy-sell agreements through life insurance;
- redeeming shares following death;
- family business succession;
- intergenerational ownership transitions;
- estate freezes;
- shareholder exits; and
- trust planning.
Corporate and tax planning often occur together.
Employee and Founder Buybacks
Corporations frequently repurchase shares from:
- departing founders;
- employees;
- consultants;
- executives;
- directors;
- option holders; and
- minority shareholders.
The governing agreements should clearly address valuation, payment, timing, and closing procedures.
Closing the Transaction
A share repurchase commonly involves:
- negotiating the purchase price;
- preparing a Share Repurchase Agreement;
- obtaining corporate approvals;
- director resolutions;
- shareholder resolutions where required;
- updating share registers;
- cancelling share certificates;
- updating the securities register;
- updating the minute book;
- tax reporting; and
- completing any related corporate filings.
Proper documentation is essential to preserve the validity of the transaction.
Common Share Repurchase Issues
Businesses frequently seek legal advice regarding:
- shareholder agreement interpretation;
- valuation disputes;
- corporate solvency;
- director approvals;
- tax planning;
- family business succession;
- employee departures;
- founder exits;
- estate administration;
- improperly documented historical buybacks;
- minute book deficiencies; and
- shareholder litigation.
Early legal advice often prevents disputes before they arise.
Regulated Businesses
Repurchasing shares in regulated businesses may require additional analysis.
Ownership changes may affect:
- cannabis licences;
- liquor licences;
- payment service provider registration;
- financial services businesses;
- food businesses;
- pharmaceutical companies;
- transportation licences; and
- other regulated industries.
Notification or regulatory approval requirements should be reviewed before the transaction is completed.
Our Share Repurchase Services
Substance Law assists clients with:
- Share Repurchase Agreements;
- share buybacks;
- share redemptions;
- shareholder exits;
- corporate reorganizations;
- shareholder agreement drafting;
- succession planning;
- founder buyouts;
- employee equity repurchases;
- valuation issues;
- corporate approvals;
- minute book updates;
- tax-driven corporate reorganizations (working alongside tax advisors); and
- post-closing corporate documentation.
Work With a Share Repurchase Lawyer in Canada
Whether your corporation is repurchasing shares from a founder, buying out a retiring shareholder, implementing a shareholder agreement, or restructuring ownership, Substance Law can help ensure the transaction is properly documented and completed in accordance with applicable corporate law.
Frequently Asked Questions About Share Repurchases in Canada
What is a share repurchase?
A share repurchase is a transaction in which a corporation purchases its own issued shares from one or more shareholders. The acquired shares are generally cancelled.
Is a share repurchase the same as a share redemption?
Not always. A share redemption generally involves redeemable shares that are redeemed pursuant to rights contained in the corporation's articles, while a share repurchase typically involves the negotiated purchase of issued shares by the corporation.
Can a Canadian corporation buy back its own shares?
Yes, provided the applicable corporate statute, the corporation's articles, shareholder agreements, and any applicable solvency requirements are satisfied.
Do directors need to approve a share repurchase?
In most cases, yes. Corporate approval is generally required, and additional shareholder approval may also be necessary depending on the circumstances.
Are share repurchases subject to tax consequences?
Yes. Share repurchases may have significant tax implications for both the corporation and the shareholder, including deemed dividend and capital gains considerations.
Can shareholder agreements require a share buyback?
Yes. Many shareholder agreements include mandatory or optional buyback provisions following events such as death, disability, retirement, or termination of employment.
Do share repurchases require updates to the corporate minute book?
Yes. Director resolutions, share registers, securities registers, cancelled share certificates, and other corporate records should generally be updated following the transaction.
Can Substance Law assist with Share Repurchase Agreements?
Yes. Substance Law assists corporations and shareholders throughout Canada with Share Repurchase Agreements, shareholder buyouts, corporate reorganizations, ownership restructurings, minute book updates, and related corporate law matters.
